CIO East Africa (Nairobi)

22 August 2013

Kenyan Govt VAT On ICT Will Hurt the Underprivileged

Imposing VAT on the Kenya's ICT products will hurt the rural and underprivileged parts of the Kenyan population, says Jussi Hinkkanen, Vice President, Corporate Relations, Nokia India, Middle East and Africa. The VAT holiday was designed to speed up Internet penetration growth in the country in which so far a great progress has been achieved.

Hinkkanen claims that the official Communication Commission of Kenya (CCK) reported figures do not tell the whole picture. According to CCK, mobile handset penetration is around 77 percent, but when you clean this from duplicate SIM-cards and devices, the real penetration figure is somewhere around 30-35 percent or around 60 percent of addressable population (15-65 year olds). Meaning that much of the population is still uncovered.

Much of the urban population is already covered, but rural areas are lagging behind with access levels as low as 10-15 percent. Re-introduction of VAT will further build up barriers between urban and rural dwellers and as PC penetration remains low in emerging economies, mobile phones can assist in cost effectively closing the penetration gap with more developed nations

For instance Ghana, Rwanda, Senegal as well as Kenya have demonstrated the abolition of taxes speeds up growth of ICT penetration in the country e.g. 7 percentage point increase in Kenya over 6 months post reduction from the prior. The current penetration levels in Kenya that surpassed Nigeria can be attributed to the abolition of VAT on ICTs.

Re-introduction of VAT on ICT products will have negative effects not only on mobile penetration growth but on Kenyan ICT industry and overall economy as well, VAT on ICT would slow down penetration growth, particularly internet access that will have a negative impact on the national broadband strategy objectives.

Emerging Kenyan ICT industry heavily relies on rapid growth of data penetration, VAT increase would potentially slow down the progress of Kenya becoming the de-factor hub for African ICT development. At the end of the day, this will impact multiple Vision 2030 developments.

Maintaining zero percent VAT on ICT products in Kenya would maintain greater accessibility to data and communication services, help in closing digital divide and driving economic performance whereas restoration of VAT will only cause a temporary increase in government tax revenues

"The resulting decrease in growth of mobile activity and slower penetration growth will impact negatively on the economy resulting smaller tax base than by maintaining the current tax exemption on mobile handsets", says Hinkkanen.

Cash-lite Society Dr. Tonny K. Omwansa, School of Computing and Informatics, University of Nairobi says by introducing the tariff, the young IT industry will experience great pressure that will slow the momentum towards cash-lite society. The digital economy penetration at rural areas will be affected most, the government will meet its short-term goals but long-term effect will negate all these short-term goals.

Omwansa says as a gardener, the government should:

1. Water the plants: by supporting innovations by providing appropriate financial support

2. Remove the weeds and pests: by removing regulatory, institutional or competitive obstacles to innovation

3. Fertilizing the soil: by strengthening the knowledge base through investment in education and research.

Impacts of VAT on Kenyan startup ecosystem

Increase price barrier to limit handset ownership and therefore consumption of telecommunication and internet services

Restricted scaling opportunities for mobile apps and services

Limited market growth potential for local tech start-ups.

Promotes basic phones and defers benefits of the "sub- USD 100" smartphone.

Locked possibilities: Inability of developers to leverage tech advancements and rich features of smartphones for solution delivery for the masses

Diminished innovation quantity/quality around dynamic mobile solutions and the next big thing

Influx of grey and cheaper markets

Wasted content creation efforts: Inability to maximize benefits of locally tailored content created by frustrated local developers

Market fragmentation and obscurity: What devices are out there? Which do I build for to get the best result? How many app versions do I need? Who will support me?

Peter Nalika

Peter generates technical content for CIO East Africa and the International Data Group News Service, he also contributes to PC World and Computer World. Peter is classically trained in computing and information management, and he is currently pursing an MBA program in Management Information Systems at the University of Nairobi, @peternalika

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